Once you file a Certificate of Formation with the Texas Secretary of State, you officially own a business structured as a limited liability company (LLC). Congratulations! You will enjoy the advantages of pass-through tax status like partnerships and sole proprietorships, as well as liability protection like corporations.
You are not required to file information about how you will operate the business and how much of the company you and other owners (knowns as members) will own, which directly affects profit allocation. However, it is highly recommended that you establish this information in a written document with help from a skilled business attorney. At Sparks Law, a Texas operating agreements lawyer can assist in drafting a contract agreed upon by all members to avoid future misunderstandings.
Members will find an operating agreement crucial in ensuring the business procedures implemented are those they want in place. Without this document, any problems will be handled according to the Texas Business Organizations Code, which may differ from what could be in the operating agreement. The agreement should offer details about:
Members should include additional covenants and explanations depending on their vision for the LLC. An experienced attorney in Texas can help members memorialize their vision through a well-drafted operating agreement.
Forgoing a written operating agreement can be a huge mistake, as Texas law may go against the members’ wishes. For instance, an operating agreement can discuss how members can leave the company or the grounds for expulsion if a member does not live up to responsibilities. Without an operating agreement, under the Texas Business Organizations Code § 101.107, members cannot resign, and other members cannot terminate them.
Additionally, an operating agreement spells out the value of initial and future capital contributions and how profit will be allocated based on percentage ownership. One member may own a larger portion of the business based on the value of their contribution. Under TBOC § 101.203, distributions are allocated according to the value placed on contributions as retained in the records. Members will surely squabble over valuations if there is no operating agreement, landing them in court.
One solution the courts may use is to distribute equal profits to members, so the one member with the larger contribution ends up losing out. To avoid the high cost of litigation, members should draft an operating agreement before disputes arise with help from a local attorney at our firm.
Whether the LLC is owned by one member or many, an operating agreement provides the same benefits by giving owners control over how it is run instead of ceding all control to Texas law. A single member who has dreams of growing the business should prepare now by stipulating how new members can purchase ownership shares.
Having this in writing prevents problems in the future. All limited liability companies in Texas should consult a nearby attorney about securing their business goals through a written operating agreement.
Nationwide, the limited liability company structure is the most popular for new business owners. It affords flexibility in its tax structure and less stringent government filings. However, although an LLC is not required to adopt an operating agreement, it is still in members’ best interests to draft this important document with legal assistance.
You want a record of all essential aspects of your business so that members are not arguing and suing each other over misunderstandings. At Sparks Law, a Texas operating agreements lawyer can advise on the important information to include in a contract tailored to your business goals and needs. Call our office to schedule an initial consultation today.